Further UK property fund redemption suspensions are probable

The suspensions of redemptions in the Kames Property Income Fund and Janus Henderson UK Property PAIF fund on 16 March, followed by the Aviva Property Trust a week later, are likely to be followed by similar actions by other UK open-end commercial real estate (CRE) funds, Fitch Ratings says.

UK CRE funds have a history of applying extraordinary liquidity management measures, such as suspending redemptions (or "gating"), as a result of their acute asset-liability liquidity mismatch. The gating of the three funds, along with the suspension of several Danish bond funds last week, indicates increasing stress in European open-end mutual funds.

Suspension of redemptions due to high outflows may be triggered before fund boards can implement a pricing-uncertainty-driven suspension. The level of cash and available liquid assets in UK CRE funds has been falling marginally. Fitch estimates that funds had average liquidity of about 15.7% at end-2019, falling to 15.5% at end-January. However, liquidity varies significantly among funds, ranging from 27.4% to a low of 4.8% (end-January data).

Among those funds that remain open, the lowest level of liquidity was 8.3%, implying that redemption requests in excess of this amount would trigger a suspension of redemptions.